Bitter Trade Debate Near in Ottawa

By JOHN F. BURNS, Special to the New York Times

Published: May 23, 1988

OTTAWA, May 22—
Seven months after turning Canada's economic policy around by signing a free-trade agreement with the United States, the Government here is entering a decisive phase of its battle for the agreement at home.

On Tuesday the Government will introduce legislation in Parliament to put the agreement into effect. This will begin what is expected to be one of the bitterest debates since the British colonies of North America banded together to establish Canada in 1867.

Prime Minister Brian Mulroney's overwhelming Conservative majority makes him virtually certain to prevail in the House of Commons fight against the opposition Liberals and New Democrats, but even Mr. Mulroney has acknowledged that nothing will really be settled until the issue is put to Canada's 15 million voters in an election.

The last year of the maximum five-year parliamentary term is approaching, so Mr. Mulroney cannot delay an election beyond the summer of 1989.

When the election is called, Canadians will in effect be facing a referendum on whether to turn their backs on the cautious protectionism espoused by their nation since the 1870's or whether, by pulling down most of the remaining economic barriers between Canada and the United States, to commit themselves to a continental economy in which this nation of 25 million people competes on level terms with the 242 million people of the United States.

In Washington the agreement appears to be on its way to ratification after its adoption last week by the Senate Finance Committee, where American opposition had centered.

In the light of concessions that the committee wrote into the implementing legislation on behalf of opponents, including Western resource industries that are concerned about losing markets to subsidized Canadian competitors, the Senate is considered likely to approve the agreement this summer. All that would be required for it to go into effect on schedule next Jan. 1 would be Canada's ratification.

But with both the Liberals and New Democrats vowing to abrogate the agreement if they win the next election, the pact could collapse almost as soon as the two countries begin putting into effect the complex provisions in its 1,000-page text.

Together, these provisions envisage the elimination over 10 years of all tariff and most nontariff barriers in what is already the world's largest two-nation trading relationship. Americans and Canadians exchanged more than $150 billion of goods and services last year. Easing a Cause of Friction

Among other things, the pact would eliminate or substantially restrict most Canadian controls over United States investment and energy trade, two issues that have long been a cause of friction with Washington.

For Mr. Mulroney, an uphill battle for the agreement lies ahead.

Although recent polls show a narrow majority of decided voters favoring free trade, about 35 percent of those polled say they have yet to make up their minds.

Moreover, other issues, including the low personal approval ratings that Mr. Mulroney has been getting in the polls, have pushed the Conservatives down to 28 percent of decided voters in the Gallup ratings, against 41 percent for the Liberals and 31 percent for the New Democrats. Thus an election would seem likely to produce a narrow Liberal edge.

Equally daunting for the Conservatives, the free trade debate has reopened old wounds in a country that has an instinct for compromise. Both Sides Are Powerful

Supporters of free trade include most of the country's big businesses, while the most powerful trade unions are strongly against it. The provincial governments of Quebec, Manitoba, Saskatchewan, Alberta and British Columbia are adamantly in favor, but Ontario, the nation's economic powerhouse, is opposed. The country's two most influential newspapers are divided, too: The Globe and Mail of Toronto, regarded as the newspaper of the establishment, backs the pact, and The Toronto Star, a more popular daily, campaigns stridently against it.

Mr. Mulroney, regarded as a powerful election campaigner, has expressed strong confidence that Canadians will choose to favor the agreement. In an interview last month with United States reporters based in Canada, the 49-year-old Prime Minister recalled that he entered the 1984 general election as a 20-point underdog to the ruling Liberals but won a landslide victory.

''This is a vital moment in the history of our hemisphere,'' he said, referring to the trade pact. ''This thing deserves to be adopted by both countries with pride, and I expect it will be.'' Business People Nervous

But his upbeat view is not widely shared in the business community, which remains nervous about a possibility of the pact's collapsing amid a groundswell of opposition here. Previous attempts to liberalize trade with the United States failed three times in the past century. The anxiety on Bay Street, Toronto's financial center, was demonstrated last Wednesday: the Canadian dollar fell half a cent, its biggest one-day drop this year, to 80.25 United States cents after the Ontario premier, David Peterson, threatened a court fight to block the free trade pact.

Mr. Peterson, whose province accounts for nearly half the country's industrial exports, has dug in over Ottawa's demand that Ontario drop its discriminatory price mark-ups on imported wines and spirits. This practice would be outlawed by the free-trade agreement. Removal of the mark-ups had previously been demanded by a tribunal established under the General Agreement on Tariffs and Trade, the Geneva-based body that oversees international trade. Issue of Protectionism

The premier has said he is acting on behalf of Ontario's fledgling wine industry, despite Ottawa's offer to help it financially.

The 44-year-old Mr. Peterson, a Liberal, also has become the stalking horse for a broader-based opposition to free trade. He argues that the pact would narrow Canada's freedom to maneuver - in matters like industrial subsidies, energy trade and restraints on Americans' investment -so much that Canada would cease to be a fully sovereign nation.

In the future, he warned last week, any time that a Canadian federal or provincial government contemplates economic legislation ''they're going to have to run down to Uncle Sam and say, 'Does this square with the free-trade agreement?' ''